Third-Party Cyber Risk: Identifying, Managing & Reducing Vendor Threats

Most businesses operate in a highly connected online world. Partners, vendors, and customers are all digitally connected and part of a massive network. Businesses often use external vendors and partners to enhance efficiency and maintain a competitive edge. 

While this growing interdependence brings operational efficiency, it also introduces a critical concern, a third-party cyber risk. Granting vendors access to your systems or sensitive data means their security practices directly impact your own. A single weakness on their end can lead to breaches or business disruptions on yours. To manage this exposure, organizations are increasingly turning to specialized third-party cyber coverage and robust risk management platforms that offer continuous monitoring and protection.

In this article, we’ll break down what a third-party cyber risk is, understand its potential risks, why it matters more than ever, and how you can stay one step ahead.

What is a Third Party?

A third party is any external organization, vendor, or contractor your business relies on for products, services, or operations, but is not part of your internal workforce. Third parties generally integrate with the enterprise ecosystems to handle anything from core IT functions to very specific business processes. 

They typically fall into different categories based on their roles:

• Upstream vendors that provide core business functions such as cloud hosting, SaaS, or financial data platforms.
• Downstream vendors that assist with services to your customers, such as logistics services, payment processing, or call centers.
• Fourth party, who’s the vendor's vendor, usually operating behind the scenes yet still carrying an indirect risk to your business.

For example, in the BFSI sector, third-party vendors can be upstream (core banking software providers, credit scoring agencies, anti-money laundering solution providers) or downstream (wealth management platforms, payment gateway services, or debt collection agencies). 

Since in many cases these entities integrate their operations into yours, they may be granted access to your networks or data, creating a security threat. Whether assessing the risks of third-party software or physical access of the vendors, each external touchpoint must be evaluated.

This can be a complex terrain because it includes not just IT and security vendors but also recruitment outsourcing companies, marketing agencies, legal consultants, hardware repair teams, and offshore developers. Each of these entities can pose cybersecurity, operational, compliance, or reputational risks to you, irrespective of their size or scope.

As your digital footprint grows, so does your third-party risk. Most regulations expect businesses to vet and monitor third parties as thoroughly as internal teams. Identifying who your vendors are, what access they have, and how they conduct their business is the first step toward building a secure and compliant vendor ecosystem.

What is a Third-Party Cyber Risk?

Third-party cyber risk refers to security threats originating from external entities, such as vendors, contractors, or service providers, with access to your networks, applications, or sensitive data. Managing these risks requires a proactive, continuous, and comprehensive approach from your security team.

A well-designed third-party risk management (TPRM) program can help you monitor these vulnerabilities continuously, identify threats early, provide actionable insights, and reduce exposure from unchecked third-party risk intelligence gaps.

Why Should You Care About Third-Party Risks?

With the increasing dependence of businesses on outsourcing more work, third-party risk is a critical concern. Breaches originating in partner networks are also common. For instance, according to the Verizon 2025 Data Breach Investigations Report, 30% of data breaches that occur start with one of the third-party vendors involved, making proactive tools for cybersecurity risk assessments essential to stay ahead of these vulnerabilities. 

The takeaway? If one of your trusted partners gets hit, your business could feel the impact just as bad, if not worse. Without adequate third-party cyber assessment and monitoring, these inherent risks can quickly escalate and lead to serious consequences like regulatory fines, financial losses, lawsuits, and even lasting reputational damage..

Major Incidents That Prove the Risk

Across industries, organizations have suffered massive data breaches, financial losses, and reputational damage due to vulnerabilities introduced by external vendors.

In the month of May 2023, the Clop ransomware gang exploited a zero-day in a flaw found in the MOVEit file-transfer system used by a vendor for the U.S. Centers for Medicare & Medicaid Services (CMS). Almost 946,801 beneficiary records (names, Social Security numbers, claim info) for Wisconsin were compromised, demonstrating how flaws in vendor software can promptly escalate into major financial-sector catastrophes.

On February 21, 2024, a cyberattack hit Change Healthcare, a critical third-party provider in the U.S. healthcare system. This disrupted payouts forced patients to pay out-of-pocket, and halted claims processing across major providers like UnitedHealth, CVS, and Walgreens leading to an estimated $100 million per day in losses. 

On June 19, 2024, CDK Global (a major IT provider for car dealerships) was hit by a ransomware attack through a third-party vendor. The breach disrupted thousands of dealerships across North America, prompted a $25 million ransom payment, and was followed by multiple lawsuits.

Similarly, In April 2025, Scattered Spider hackers leveraged compromised credentials at Tata Consultancy Services (TCS), a key third-party vendor, to infiltrate Marks & Spencer. The attack caused widespread outages, customer data exposure, and an estimated £300 million loss.

These incidents underscore the reality that even the most trusted partners can become gateways for cybercriminals. Whether through software flaws, credential theft, or ransomware-laced access points, third-party risks can trigger widespread fallout. 

When “Simple” Vendors Create Complex Risks

It is not just software providers or IT vendors that you need to worry about. Even non-technical vendors like photocopy technicians can pose a threat if they access sensitive areas or connect to your internal systems. Something as simple as walking through a data room or plugging into your network can create a potential backdoor for cyber threats.

That’s why it’s essential to monitor all vendor interactions closely. Using platforms that offer third-party risk intelligence can help spot early warning signs before such minor oversights turn into full-blown breaches.

Types of Third-Party Risks

Third parties can bring in different kinds of risk:

• Cybersecurity risk boils down to the likelihood that your data could be lost or your systems hacked because one of your vendors has a security problem. If the supplier's server gets malware, that malware could quickly jump over to your systems. Or if they have a software flaw that has not been fixed, it creates an open door for attackers to sneak in and grab your sensitive information.
• Operational risk is the probability of your business coming to a halt because an outside company you rely on fails to deliver. What if a critical supplier suddenly stops delivering what you need, or what if they fail to provide services at the level they committed to?
• Legal or compliance risk means your company can get into trouble and face fines or other penalties. If one of your partners does not follow the rules, or if a vendor mishandles your customers' private data and fails to comply with privacy regulations like GDPR or HIPAA, compliance and regulatory monitoring solutions can help ensure you are covered and audit-ready.
• Reputational risk is the hit to your public image when one of your partners messes up. If a vendor has a security problem, your customers and the media might lose trust in your organization. For instance, if a partner experiences a data breach, it can cause a flood of negative news for your company, even if you were not directly at fault.
• Financial risk is the loss of money incurred to a company by a third party. Ranging from lost sales due to a broken supply or unexpected costs incurred when you have to fix problems caused by a third party.
• Strategic risk is when a partner's problems derail your long-term goals. If you're counting on a vendor for a new product or service, their failure could stop you from achieving business objectives.

The reality is that these risks often overlap. A cybersecurity breach might lead to legal fines, financial losses, and damage to your reputation simultaneously. That is why many businesses now proactively invest in third-party cyber coverage as a safety net helping tackle not just IT risks but the legal and financial aftermath too.

How Different Industries Handle Third-Party Cyber Risk

Every industry faces unique third-party risks, but the need for prompt management is universal. Here's how various sectors benefit from TPRM platforms:

• BFSI: Real-time monitoring of upstream and downstream fintech partners; rapid audit response
• Healthcare: Ensuring vendors meet HIPAA requirements and medical data protection
• Retail: Flagging risks from POS vendors and eCommerce API providers
• Manufacturing: Tier-based vendor classification to protect IP and logistics

Common TPRM Challenges Businesses Face Without the Right Tools

Before we talk solutions, it is crucial to understand the daily roadblocks most businesses face while managing third-party risk manually:

• Managing vendors through spreadsheets and emails gets chaotic fast
• Security assessments are often inconsistent or skipped
• There's no centralized dashboard to track vendor risk in real-time
• Audit documentation is scattered, increasing compliance anxiety

Emerging threats often go undetected until it's too late. These are exactly the kinds of inefficiencies that third-party risk management platforms like ComplyScore® eliminate by centralizing vendor data, automating tasks, and providing actionable insights from one place.

How To Minimize Third-Party Risks

Reducing third-party cyber risk requires a structured program and timely third-party risk assessments. A BlueVoyant study details that more than 80% of organizations reported that they were the victims of a cyber breach in their supply chain over the past twelve months, with 3.7 breaches on average.

This means most organizations do not have complete visibility into their third-party relationships and potential vulnerabilities, highlighting a huge blindspot in most high-risk programs. You can implement these three basic steps to get started

1. Keep an up-to-date vendor inventory

You can’t manage risk if your security teams don't know your vendors. Begin by listing every third-party provider that has access to your systems. This inventory should have primary vendors as well as their subcontractors. Regularly update the list to add new contractors and remove old ones. Automate this process to save a lot of time and manpower. Some organizations use attack surface management tools like Microsoft Defender to discover every new external connection or IP that interacts with their network. A clean, updated inventory ensures you know who has access to what and can monitor it promptly.

2. Establish a vendor assessment process

With your inventory in hand, implement a formal way to evaluate vendors. Send security and compliance questionnaires and guidelines to any new or existing vendor and review their responses against your requirements. You can tailor the assessment to the vendor’s role. For example, a cloud storage provider handling sensitive data will need a more thorough audit than a stationery supplier. The goal is to gather key risk and compliance information about each vendor’s practices. This step helps you decide which partners meet your standards and identifies gaps that need remedy.

3. Implement a third-party risk management program

Once you have processes for inventory and assessment, incorporate them into an ongoing TPRM framework. Categorize vendors by risk level such as high, medium, and low, and continuously manage each category appropriately. High-risk vendors may require regular security scans or audits, while lower-risk vendors can be assessed annually. By the way, third-party risk management should not be “set-and-forget”; questionnaires and security audits should be done periodically and monitored in real-time.

Automating these tasks is often necessary since manually handling hundreds of vendors would overwhelm any security team. Practically, a mature program will use automation to scale audits, track remediation tasks, and generate risk dashboards. Solutions like ComplyScore® by Atlas Systems are designed specifically for these needs.

Following these steps creates a prudent TPRM program. You’ll know who your vendors are, understand their risk profiles, and have workflows in place to monitor and improve their security over time. The upside is the ability to catch issues early and respond quickly if a third-party incident occurs.

What to Look for in a Third-Party Risk Management Platform?

When evaluating a TPRM solution, consider these features to ensure you're choosing a platform that supports both security and scalability:

• Customizable risk assessment workflows
• Integration with vendor portals, procurement tools, or ERP systems
• Real-time threat intelligence and automatic scoring
• Centralized audit logs and compliance reports
• Built-in support for regulations like GDPR, HIPAA, and SOX
• Scalable for hundreds (or thousands) of third-party vendors
• AI/ML-powered prioritization and recommendations
• Responsive customer success and support teams

Mitigate Third-Party Cyber Risks With ComplyScore®

Third-party cyber risk is an inevitable reality in today’s connected business environment and may seem daunting. From software providers to non-technical service partners, every external entity poses an inherent risk, a potential vulnerability. By understanding the different types of third-party risks, identifying your vendors, conducting thorough assessments, and implementing continuous monitoring, you can significantly reduce the odds of a vendor breach derailing your business. In today’s hyper-connected environment, managing third-party risk is not optional, it’s essential to protect your operations, data, and reputation.

Atlas Systems’ ComplyScore® is a complete third-party risk management solution tailored to your industry’s compliance needs that makes this process smarter, faster, and easier. With features like automated assessments, real-time monitoring, and centralized reporting, our platform simplifies risk management. Ready to take control of your third-party risk? 

Explore how ComplyScore® can streamline your third-party risk management, reduce manual effort, and keep your business audit-ready at all times.

FAQs

1. What is a third‑party cyber risk assessment?

A third-party cyber risk assessment evaluates the security level of a vendor by analyzing their controls, systems, and processes. It typically involves setting risk criteria, categorizing vendors based on potential impact, and using tools to monitor their security hygiene over time.

3. How can you evaluate third‑party cyber risk effectively?

An efficient evaluation goes beyond questionnaires and follows the life cycle of vendor management.

• Automate onboarding: Include background checks, financial stability, security reviews, and compliance validation upfront
• Profile and categorize: Use vendor profiles with risk tiering (high, medium, low) to prioritize continuous monitoring
• Continuous assessment: Monitor control effectiveness, patch levels, and real-time threat intelligence throughout the partnership life cycle

You can use a TPRM solution like ComplyScore® to automate these steps and ensure coverage for both onboarding and ongoing risk reviews.

3. What is an example of a third‑party risk?

Beyond cyber-attacks, vendors can pose a strategic quarantine risk. A critical supplier might face a natural disaster, regulatory action, or sudden insolvency that disrupts your operations even without a security breach.

4. What questions should you ask in vendor governance reviews?

You should enquire about consistency, accountability, metrics, and integration of processes into enterprise frameworks. Some sample questions would be:

• How consistently are TPRM policies applied across business verticals?
• What are the measurable KPIs used for evaluating vendor risk outcomes?
• Is risk tracked throughout the vendor lifecycle?

5. What’s the most valuable practice in TPRM?

Industry experts point out that continuous monitoring and lifecycle management are crucial. Simply conducting initial assessments won’t be effective enough.  TPRM solutions like Complyscore continuously monitor vendors to ensure the best security for your data.